Something Changed In 2014

For all the talk about the various "tools" in central bankers' arsenals to influence monetary policy, to manipulate stock markets and to soak up global bonds (they now hold more than a third of the total $54 trillion in in global bonds), the fundamental - and very simple - purpose of any "developed" central bank is one: to restore and boost consumer (and in recent years investor) confidence during times of stress, promoting a vibrant economy in which the velocity of money is high, where commerce and economic transactions are ample, and where inflation (at least in a Keynesian world) is sufficiently high to gradually inflate away the debt burden and reduce the incentive to save. Boost confidence, the thinking goes, and everything else will follow from there.

And while that may historically have been the case, something changed significantly in 2014.

This is obvious from one chart in the latest OECD Economic Outlook report issued earlier today, which shows that while consumer and the all important business confidence do indeed go hand in hand...

... when it comes to the correlation between consumer confidence and global retail sales growth, arguably the core driver behind a global economy that is predicated upon spending (in the US this is roughly 70% of GDP) the correlation broke spectacularly in 2014 as shown in the chart below for reasons that are not quite clear.

What may have caused this dramatic divergence is not clear. This is what the OECD says on the topic:

In a number of countries, confidence measures have rebounded to a much greater extent than "hard" indicators of activity, raising issues about the reliability of the signals provided by these measures for future activity. While global business confidence appears to remain a useful signal of likely developments in global industrial production, the association between consumer confidence and global retail spending has fallen sharply in recent years, suggesting that limited weight should be given to fluctuations in this measure in the absence of supporting developments in "hard" indicators of spending and income. This disconnect has also been apparent in the early part of 2017, especially in the advanced economies, with consumption growth moderating despite rising confidence, in part due to the drag on purchasing power from higher headline inflation.

In other words, the OECD is clueless. And while one potential answer may emerge from the following chart of global policy uncertainty which started rising roughly the same time the correlation between retail sales and confidence collapsed...

... it is hardly the full answer.

Which begs the question: even though central bankers may still influence consumer confidence and overall sentiment, if the link between sentiment and spending - the beating heart of any developed economy - is now broken, just what role do central banks play in this post-divergence world, and is there even a need for them?

Source: OECD